Is your business currently factoring its receivables? Are you thinking about engaging in a factoring relationship? If so, there are a couple of things you need to look out for when evaluating potential funding partners and their factoring contracts.
First and foremost, don’t get locked in to a long-term contract. Contracts with one year terms are one thing and should be expected. Contracts with multi-year terms and significant or even undefined termination penalties should be avoided like the plague.
Similarly, if your factoring agreement states that you must sell all of your receivables regardless of your need to do so, you should start looking around. Your factoring arrangement should mimic the flexibility of a traditional line of credit.
If your factor is not open to discussing these terms, shop around and keep looking.
2. Direct Source of Funds
Why is it important to understand where your factor is getting their money? Because like all supply chains, more middlemen likely equates to more costs passed on to the end user.
If your factoring company is borrowing its money from a bank and then utilizing its line to purchase your receivables, then there are two important things to note:
- The cost of borrowing their funds from their bank is likely passed through to your business in the form of higher rates.
- The stability and security of your funding is reliant on your factoring company’s ability to remain in the good graces of their bank.
The easiest way to ensure your factor is providing a direct source of funds is to work with the source of funds itself – a bank. Alternatively, if your factor is an independent financing company, ask where they get their funding from and how long they’ve maintained that relationship.
In the event of economic turmoil, you’ll want to know that your financing partner won’t be cut off.
Whichever company you choose to factor your receivables, ensuring that your counterparty is a qualified, respected, and professional organization is easily the most important attribute of a successful factoring relationship.
How do you know if your factor is reputable? Just look at their interactions with your business in the buying process.
- Are they not only knowledgeable about their own products but your business as well?
- Is their pricing straightforward with no lockbox fees, transaction fees, clearance fees, etc.?
- Are they responsive to your calls, emails, and questions?
- Would you hire them for your business?
Rate is important, keeping your customers happy and loyal is critical. Don’t shop solely on price and make sure your factoring company is who you want representing your business.